Now this could slow the economy: China gets tough--maybe--with local government lending

A government report due at the end of June will sharply curtail the borrowing platforms that local governments have used to finance property development and infrastructure, according to a story by Caixin today http://english.caing.com/2011-06-22/100272075.html

The decision--if enforced with reasonable speed—would do more to slow the growth of new loans in China and to slow the Chinese economy that any of the increases in bank reserve requirements or benchmark interest rates announced by the People’s Bank of China.

According to a report from the People’s Bank more than 10,000 of these local government financing platforms were in business as of December 2010. That’s an increase from 7,500 in 2008. The platforms work by borrowing money from China’s banks and then relending it to finance everything from local real estate projects to roads to factories. These loans themselves, of course, don’t show up on bank balance sheets. The total debt at these local government platforms was 14 trillion yuan or about $2 trillion as of the end of December. Many of those loans have no hope of ever being repaid since they went to projects unlikely to ever turn a profit, Fitch Ratings has warned repeatedly. Older loans through the platforms to these projects have been paid off with new loans that themselves are unlikely to be repaid.

Even before the report is final, Caixin reports, the China Banking Regulatory Commission told banks in April to start curbing platform loans. And banks have been told to end the practice of transferring platform loans and collateral among themselves to manage their balance sheets.

If the new policy has any teeth, expect it to show up first in monthly figures on investment in fixed assets such as real estate and commercial and industrial buildings.